Way Too Hot to Hold

By Barbara Rudolph

Like baseball teams and ballet troupes, Wall Street investment firms are built around stars. Well known and well paid, cosseted and coddled, the stars eventually become almost synonymous with the institutions that employ them. Nowhere was this more true than at the elite investment firm of First Boston, where the duo of Bruce Wasserstein and Joseph Perella created a mecca for merger-and-acquisit ion advice. Owing largely to their prestige, First Boston was the busiest takeover player on Wall Street last year, handling an estimated 174 deals. Serving as masterminds in some of the biggest corporate struggles of the decade, the two men have sparred with raiders ranging from T. Boone Pickens to Carl Icahn and have invented strategies like the "Pac-man" defense, in which a raided company turns around and gobbles up its attacker. Almost every corporate battle in which they have been involved has become the stuff of high drama, from Du Pont's $7.4 billion takeover of Conoco in 1981 to Canadian Robert Campeau's current $5.5 billion bid to acquire Federated Department Stores.

But in one stroke last week, First Boston lost its takeover titans to two lures: greater freedom and, though each already makes about $6 million a year, bigger rewards. Wasserstein, 40, and Perella, 46, along with high-ranking Colleagues Charles Ward, 35, and William Lambert, 41, abruptly quit First Boston to start a rival firm. Adding to their employer's misery, they immediately began recruiting First Boston co-workers and clients. Their departure, while certainly the most dramatic Wall Street split in years, is only one episode in a broader upheaval and personnel shuffle taking place on the Street. In the wake of October's crash, hefty trading losses and a slowdown in business have forced investment firms to cut back their payrolls and curb their appetites for expansion. At the same time, the First Boston episode highlights an increasingly common Wall Street struggle between the traders who buy and sell securities and the dealmakers who negotiate and finance takeovers.

Wasserstein and Perella say they left First Boston after a dispute about strategy. The two, who served as co-heads of First Boston's investment-banking operations, failed to persuade their bosses to increase the firm's financial commitment to mergers and acquisitions. The two dissidents believed the statistics were on their side, since the highly profitable investment-banking group produced $850 million of the company's $1.3 billion in revenues last year. The two men wanted First Boston to devote fewer resources to the firm's trading side, since revenues from those money-losing operations plunged 47% last year, to $211.6 million, largely as a result of the drops in the stock and bond markets.

The rift between First Boston's top management and the two stars had been growing for months. Last July, Chief Executive Peter Buchanan, 53, launched a review of the firm's operations. While Wasserstein and Perella hoped that the study would spark a complete rethinking, the report called for "no fundamental change in strategic direction." Wasserstein and Perella chafed against the firm's policies, even though the men were given increased power and responsibilities only three weeks ago. Says Perella: "It was like being put in charge of the dining and engine rooms of a ship, while the guys at the helm keep to the old course."

After Perella and Wasserstein finally decided to bail out last week, they met Monday night at the office of their law firm, Wachtell, Lipton, Rosen & Katz, where attorneys helped them draft a charter for their new company. The next morning the two went to First Boston and wrote their resignations. "This is a decision not reached easily," read Perella's handwritten note. Says Wasserstein: "I was flattered to be well paid, but I disagreed with the firm's management on fundamentals." The departing stars made an 11 a.m. appointment with Buchanan in his 43rd-floor Manhattan office, where they cordially delivered their bombshell. Afterward, they scurried across the street to their lawyers' office to begin working the telephone to recruit an initial 30 employees, many of them from First Boston. Meanwhile, Buchanan promptly named a new pair of rising stars to take over the investment-banking department, James Maher, 38, and Richard Bott, 40. Says Buchanan: "Of course, it's disruptive to lose talented people. But Maher is as solid as they come, though he has never felt the need for a lot of personal visibility."

Yet Maher and Bott will be hard-pressed to match their predecessors' style or accomplishments. In boardrooms from Pittsburgh to Palm Beach, the two men seemed an unlikely pair. Perella, a lanky 6 ft. 6 in., with an affable demeanor, towers over the rounder, more combative Wasserstein. But since the duo began building First Boston's mergers department in the mid-1970s, they have brought their firm into some of the most famous and infamous deals of the decade. In one case, the team was all too effective in helping Texaco beat rival Pennzoil in a battle to acquire Getty Oil. Pennzoil later won a breach- of-contract judgment that forced Texaco into bankruptcy and an eventual settlement of $3 billion.

Despite their profit-making ability, Wasserstein and Perella were unable to resolve a basic tension between the competing demands of First Boston's investment-banking and trading departments. During the bull-market days of the early 1980s, trading departments grew in size and influence because of their steady profit stream. But since traders are now risking large amounts of capital in increasingly volatile markets, investment bankers argue that the money would be better spent to finance ventures that lately have produced more reliable income. Dealmakers like Wasserstein and Perella are especially eager to become merchant bankers, who use their own capital to help finance mergers. Merchant bankers can make either a so-called bridge loan to a company that is attempting a merger or a direct investment in a company that is being acquired.

The struggle between traders and bankers suggests that many Wall Street firms are facing an identity crisis. In recent years many brokerage houses have tried to become global giants to provide a complete range of financial services. But the crash has made that goal far more difficult for most firms. A growing number of Wall Streeters now see a virtue in providing more customized services on a smaller scale. Says William Rifkin, a managing director of the giant Salomon investment firm: "This industry is becoming one of boutiques and behemoths."

Yet even their rivals expect that Wasserstein, Perella & Co. will prosper, despite the uncertain prognosis for Wall Street. Says Eric Gleacher, head of mergers and acquisitions for the investment-banking firm Morgan Stanley: "There are less than a handful of people who operate at their level." Several of First Boston's most important clients, including Revlon, the Henley Group and Campeau Corp., have already announced that they will work with Wasserstein and Perella, though they have expressed no intention of breaking completely with First Boston.

The feud that divided First Boston from its celebrated sons might have been avoided but for Black Monday. In a bull market, when business is good for traders and dealmakers alike, most disputes can be resolved. But leaner times breed discontent. Wasserstein and Perella may be the most famous malcontents to leave a major Wall Street firm, but they will surely not be the last.

With reporting by Frederick Ungeheuer/New York